My Personal Finance Journey

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Running Household Finance As A Business: Charting the Money-Making Machine

Contributed by mm | October 8, 2007 6:51 PM PST

This is the second installment of the series "Running Household Finance As A Business". My goal in this series is to "examine our household finance under the corporate finance microscope," which, I hope, will bring up some new perspectives in thinking about personal wealth accumulation.

In the first part of this series, I devised some fancy names for our corporate structure, including MM Household as the umbrella holding company, and Money Manager Co., Perfect Future Publishing Co., Expat Services Co. and Value Invest Co. representing our diversified income streams. While I purposefully concealed some details of each entity, it suffices to know that our financial life is really complex, or for the lack of a better term, diversified.

In this chapter, I attempt to show how all these pieces work together as a money-making machine. Let me start by showing you a chart that describes how money flows through MM Household in the first three quarters of 2007.

moneyflow.jpg

So how should you read this chart?

First, I generally categorized our business to two parts: our traditional businesses (top half of the chart) are where we earn the "sweat equity" by putting in hard work and time, whilst the Invest Co. (bottom half) is where we circulate the free cash flow generated by the traditional business to our investment portfolio, and derive investment income.

Second, you may notice the dollar figures attached to the arrows that explain the relative size of cash flows. While I do consciously left out some insignificant details (like taxes or potential tax liabilities on investment income), these numbers on the chart are more than enough to show how the machine works.

All in all, I see this chart as a great framework for a company CFO (or household CFO, for whatever it means), to analyze the business and define a profit-maximization strategy for the long run.

I'll keep more commentary to myself for now and let you study the chart a bit more, before I share how I read the chart and how some conclusions drive the way we run this machine.

This Post Has Received 8 Comments. Share Your Opinions Too.


Creative Investor Commented on October 8, 2007

I know said it's for profit-maximization, but it actually looks more like a cash-flow chart, which is not really accurate if you're looking to maximize profit.

But anyways, as I see it: you need to see where your labor makes the most profit, that would be your Perfect Future Publishing where you make $162.50/hr. At the same time you need to look at margins of diminishing returns, meaning that just because you'll put in more hours doesn't mean you'll keep getting that $162.50/hr, it will probably go down. So, you want to find a perfect balance where you make the most of your time and that is probably what you're doing here, isn't it? :)

So, Money Manager Co. is your job-related income right? Since you have investment income coming in at the bottom of the chart?

Great concept, keep plugging at it.


Trudy Commented on October 9, 2007

Did I read this correctly? The website this year has earned $65K from ads??


MiddleClass Commented on October 10, 2007

Is that right? You are making $182k salary for three quarters? It means $240k a year! You are out of middle-class status already!


PoN Commented on October 12, 2007

Wow, saving 53% of your gross is incredible! Congratulations.


Joe Commented on October 13, 2007

Trudy, I think he has a whole network of sites so it's not just for ads on this one site.


stealthy Commented on October 28, 2007

I really enjoy reading this series of your blog. This is an excellent way to look at your personal finances.


Juan22 Commented on November 1, 2007

Great post. I really like the diagram too.


Murray Commented on January 4, 2008

Perhaps you could include your charitable contributions in a future graph. With $200,000 in net worth growth in 9 months, any significant percentage of that to philanthropic causes each year could make a large impact.


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